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Facts
The assessee, a transporter, took unsecured loans from private parties and paid interest without deducting TDS. The Assessing Officer disallowed the interest expenditure under section 40(a)(ia) of the Income Tax Act. The assessee provided certificates from lenders confirming they had offered the interest income to tax. However, the CIT(A) upheld the disallowance.
Held
The Tribunal noted that Section 40(a)(ia) was amended by the Finance Act 2012 with a second proviso that is declaratory and curative in nature. If the payee has discharged their tax liability, no disallowance should be made to the extent the interest is offered to tax.
Key Issues
Whether disallowance under section 40(a)(ia) is warranted when the recipient has offered interest income to tax, despite non-deduction of TDS by the assessee?
Sections Cited
40(a)(ia), 143(3), 263
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Income Tax Appellate Tribunal, MUMBAI BENCH “ SMC ”, MUMBAI
ORDER PER VIKAS AWASTHY, J.M: This appeal has been filed by the assessee against the order of Commissioner of Income Tax (Appeals), National Faceless Appeal Centre, Delhi [ in short ‘the CIT(A)’] dated 24/07/2023, for the Assessment Year 2012-13.
Shri K.J.Bafna appearing on behalf of the assessee submitted that the short issue in this appeal is against disallowance of interest expenditure. The assessee is a transporter. The assessee had taken loans from private parties. During the period relevant to assessment year under appeal, the assessee had paid interest on unsecured loans without deducting tax at source. The Assessing Officer in assessment proceedings consequent to the order of Principal Commissioner of Income Tax (PCIT) u/s. 263 of the Income Tax Act, 1961 [in short ‘the Act’] dated 29/03/2017 completed the assessment disallowing interest paid on unsecured loans without TDS. During the course of assessment proceedings the assessee furnished certificates from the lenders indicating that the lenders have filed return of income for Assessment Year 2012-13 and have offered to tax interest income including interest received from the assessee in their respective return of income. The Assessing Officer without considering the submissions of the assessee disallowed interest u/s. 40(a)(ia) of the Act aggregating to Rs.28,28,580/-.
Aggrieved by the assessment order dated 26/09/2017 passed u/s. 143(3) r.w.s. 263 of the Act, the assessee filed appeal before the CIT(A). Before the First Appellate Authority, the assessee again furnished certificates from the respective parties stating that the interest income has been offered to tax by the payees, hence, no disallowance u/s. 40(a)(ia) of the Act should be made. The CIT(A) disregarding the submissions of the assessee upheld the assessment order. Hence, the present appeal.
2.1 The ld. Authorized Representative of the assessee submitted that once the recipient of the amount has offered the amount to tax in the return of income, no disallowance u/s. 40(a)(ia) of the Act should be made. In support of his submissions he placed reliance on the following decisions:
(i) Hindustan Coca Cola Beverage (P) Ltd. vs. CIT, 293 ITR 226(SC) (ii) DCIT vs. A.P. Industrial Infrastructure Corporation Ltd., 64 taxmann.com 331 (Hyd-Trib) (iii)New Alignment vs. ITO, 69 taxmann.com 122 (Kolkata –Trib) iv) Rajeev Kumar Agarwal vs. Addl.CIT, 45 taxmann.com 555 (Agra-Trib)
Shri Dharmvir Yadav representing the Department vehemently defended the impugned order and prayed for dismissing appeal of the assessee.
We have heard the submissions made by rival sides and have examined the orders of authorities below. The assessee has taken unsecured loans from seven parties. During the period relevant to the assessment year under appeal the assessee paid interest on said unsecured loans. Admittedly, the interest was paid without deducting tax at source. The details of the parties along with loan amount and interest paid during the relevant period is tabulated herein below:
Sr.No. Name of the parties Loan amount (in Rs.) Interest Paid( in Rs.) 1. Sunderam Finance 1,48,39,640 Not shown separately 2. Magam Finance 80,29,800 3. Navita Jain 50,000 7,800 4. Nirmal Kumar Jain 50,000 7,800 5. Nirav Jain 60,000 9,360 6. Ekta Jain 1,07,965 14,047 7. Manju Jain 3,22,585 42,240 Total 2,34,59,720 84,247 The contention of assessee is that the aforesaid parties have offered to tax interest income including interest received from assessee in their respective return of income for Assessment Year 2012-13. The assessee has also placed on record certificate from the Chartered Accountants of the six parties at pages 11 to 26 of the Paper Book viz.:
(i) Sunderam Finance Ltd. (ii) Navita Rakesh Jain (iii) Nirmal Kumar Jain HUF (iv) Ekta Paras Jain (v) Mrs Manju Jain
(vi) Magma Finance Corp Ltd. 6. Section 40(a)(ia) of the Act has been amended by way of insertion of 2nd proviso by the Finance Act 2012 w.e.f. 01/04/2013 The second proviso inserted reads as under:
“Provided further that where an assessee fails to deduct the whole or any part of the tax in accordance with the provisions of Chapter XVII-B on any such sum but is not deemed to be an assessee in default under the first proviso to sub-section (1) of section 201, then, for the purpose of this sub-clause, it shall be deemed that the assessee has deducted and paid the tax on such sum on the date of furnishing of return of income by the resident payee referred to in the said proviso.” In the case of Rajiv Kumar Agarwal vs. Addl.CIT(Supra), the Tribunal has held that insertion of 2nd proviso to section 40(a)(ia) of the Act is declaratory and curative in nature and hence, would apply retrospectively w.e.f. 01/04/2005, the date from which sub-clause(ia) to section 40(a) was inserted by the Finance (No.2) Act, 2004. Thus, considering facts of the case and second proviso to sub-clause (ia) we deem it appropriate to restore this issue back to the file of Assessing Officer to verify the certificates furnished by the assessee. If, the payee has discharged tax liability on interest paid by the assessee, no disallowance u/s. 40(a)(ia) of the Act, to the extent interest offered to tax is warranted.
In the result, appeal of the assessee is allowed for statistical purpose.